- The seller has enough money to purchase inventory to make the goods
- The seller actually makes the goods
- The shipment is made and no theft or damage occurs.
- The buyer pays the seller
- Who owns the goods at each point, in case something goes wrong.
All this requires choosing reliable vendors and customers plus a combination of financing and insurance.Here are 4 ways global trade is financed:Cash in advance benefits the seller; the buyer takes all the risk. Open account (extending credit to the buyer for 30, 60 or 90 days) benefits the buyer; the seller takes all the risk. Letter of credit is mutually beneficial. The purchaser's bank issues a letter of credit saying that it has the money and will release it on certain terms. Documentary collection is also mutually beneficial. The buyer sends document to the purchaser's bank and after the buyer agrees to the terms, the bank releases funds according to the terms of the collection. Forfaiting Forfaiting is the process where a middle-man (intermediary) purchases the accounts receivable from the seller at a discount, takes all the risk of non-payment, and makes money when the accounts receivable is paid. It is most commonly used in Europe. Loans against import Loans against import are bank loans that allow you time to convert the imported goods into manufacturered and saleable items. When you use an LAI, technically you do not own the goods until you have paid for the loan. However the goods are released to you by the bank under a TR (Trust receipts) agreement during that manufacturing period.
You must use Documentary Credit or Documentary Collection terms with the seller.
- With Documentary Credit, the seller receives documents from the buyer's bank listing the documents necessary to release the funds. The seller must present those documents in order to receive payment.
- With Documentary Collection, the seller ships the goods and presents documents to his or her bank specifying that the documents should be released to the buyer only upon payment, or acceptance of a time draft promising payment at a later date. The seller's bank sends the documents to the buyer's bank in order to collect payment.